Frequently Asked Questions: RSPs
Please note that these RSP questions and answers are intended as guidelines only and are subject to change. Please refer to Canada Revenue Agency (CRA) for complete details and calculations.
Understanding RSPs
- What is an RSP?
- Do I need an RSP?
- What is a spousal RSP?
- Can I withdraw money from my RSP?
- What happens to my RSP when it's time to retire?
- What happens to my RSP when I die?
RSP contributions
- At what age should I begin contributing to my RSP?
- Does it make a difference if I contribute regularly to my RSP?
- What is the deadline for an RSP contribution?
- What is my maximum tax-deductible RSP contribution?
- Is there any problem with always waiting until the last minute to contribute to my RSP?
- What is RSP carry forward?
- Does it make sense to borrow money for my RSP contribution?
- Can I deduct the loan interest as with other investment loans?
- Should I pay down my mortgage or put money into my RSP?
RSP investments
- What types of investments/accounts are available for my RSP?
- What kind of investments can I have in my Self-Directed RSP?
- What is an RSP?
A registered Retirement Savings Plan (RSP) is an investment account designed primarily for saving toward your retirement years. As a retirement savings vehicle, regulated by the Canadian government, RSPs have special tax benefits. Your annual RSP contribution can greatly reduce the amount of income tax you pay in that year, and the money you put away can have years of tax-deferred growth potential. You only pay tax on the amounts you withdraw. RSPs are available through chartered banks, trust companies and other financial institutions.
Contributions to an RSP can only be made by individuals with "earned income" taxable in Canada, which includes salaries, self-employment income, maintenance and alimony payments, and net rental income (but does not include income from pensions or investments). Certain other types of income may be eligible -- consult a tax advisor or Canada Revenue Agency (CRA).
CRA issues statements to individual taxpayers with their "Notice of Assessment" informing them of their RSP contribution limit for the following year.
- Do I need an RSP?
The maximum annual pension a Canadian can currently get from the Canada Pension Plan is just over $10,000.00 (if taken at age 65, as of 2009). Canada's senior population (65+) is expected to increase dramatically in the future. You shouldn't rely on government pension plans alone for your retirement income. An RSP can help you maintain your standard of living when you retire.
In addition to this, your taxable income will be reduced each year by the amount of the eligible contribution. So, the more you contribute, the less income tax you'll pay in the year that you make the contribution.
- What is a spousal RSP?
The more taxable income you have, the higher your tax bracket. You should, therefore, consider allocating future taxable income as evenly as possible between you and your spouse or common- law partner. This is commonly known as "income-splitting".
You are entitled to put all or part of any allowable RSP contribution into an RSP in the name of your spouse or common-law partner. When you both withdraw your RSP savings during retirement, the combined income tax you pay as a couple may be lower than what you would pay if all your savings were in a single RSP.
As the contributor to a spousal RSP, you benefit from the tax deduction while building a retirement nest egg for your spouse or partner. Amounts withdrawn from a spousal RSP will be considered part of the taxable income of your spouse or partner, to the extent that you have not contributed any amount to a spousal plan in the current year or the two preceding years. A spousal RSP is most beneficial in a situation where the spouse would otherwise have little retirement income while the contributor would have a significant amount of income.
- Can I withdraw money from my RSP?
Although an RSP is more effective as a long-term investment, you may withdraw all or part of it at any time.* RSP withdrawals are subject to tax and the terms of the investment you choose. But the important part is that your money is available if you need it. Withholding taxes apply on funds withdrawn from an RSP except when funds are transferred from one RSP to another, or when funds are transferred to a retirement income option such as a Retirement Income Fund (RIF).
- What happens to my RSP when it's time to retire?
By law, your RSPs must be converted to a form of retirement income by the end of the calendar year in which you turn 71. The most popular choice for Canadians is to convert their RSPs to a Retirement Income Fund (RIF). With a RIF, your investments can continue to grow on a tax-deferred basis while you withdraw the income you need.
- What happens to my RSP when I die?
The value of your RSP is paid to the beneficiary you have designated. If you have not designated a beneficiary, it is paid to your estate. In certain cases, including if your beneficiary is your surviving spouse or common-law partner, your RSP may be transferred to them on a tax-deferred basis. You should consult your District Taxation Office or legal and tax advisors for more specific information.
- At what age should I begin contributing to my RSP?
Start your RSP now. Contribute as much as you can afford, as soon as you can. Even modest regular contributions can build over the years into a significant retirement nest egg. Canada Revenue Agency makes it easy to know how much you can contribute to your RSPs each year. For your current year's limit, simply refer to your Notice of Assessment. This Notice sets out the maximum amount you may contribute in the current year, including any unused contribution room carried forward from previous years.
If you invest $500 a year for 40 years starting today, you can accumulate more than twice as much as the person who waits 20 years, and then invests $1,000 a year for 20 years. The total amount invested is the same, but look at the difference in results.
Total RSP balance after 40 years of $500 annual contributions equals $77,381.
Total RSP balance after 20 years of $1,000 annual contributions equals $36,786.
This example is based on a constant 6% rate of return in order to illustrate the advantages of tax-deferred savings and compounded returns. Because actual interest rates fluctuate, the amounts shown do not necessarily represent the value you would actually accumulate in an RSP.
- Does it make a difference if I contribute regularly to my RSP?
Contributing weekly, biweekly or monthly is an excellent way to budget for your RSP contributions. Making regular contributions not only avoids the last-minute scramble for a large, lump sum contribution, but, as the example in question 11 below highlights, you can also earn more tax-deferred income than you would waiting until next year.
You can contribute regularly to a TD Mutual Funds RSP with a Pre-Authorized Purchase Plan, or invest regularly in TD Canada Trust GICs with a Pre-Authorized Transfer Service.
Our Contribution Calculator tool can help you determine your retirement needs and the savings required to reach your goals.
- What is the deadline for an RSP contribution?
You have until March 1 (or February 29 in a leap year) to contribute to your RSP. Once this date has passed, RSP contributions are only deductible against your taxable income for the next (or any subsequent) year. (Please note: when March 1 or February 29 falls on a weekend, the deadline may be extended to the following Monday.)
- What is my maximum tax-deductible RSP contribution?
The Notice of Assessment that you received from Canada Revenue Agency (CRA) after filing last year's tax return, stated your maximum contribution for the current year. If you have not received this notice or need to double check the amount, simply call CRA. For service in English, call 1-800-959-8281. For French, call 1-800-959-7383.
If you are/were self-employed, or employed and not a member of an employer-funded Registered Pension Plan (RPP) or Deferred Profit-Sharing Plan (DPSP) --
For the 2009 tax year, your current year's RSP contribution limit is 18% of your previous year's "Earned Income" to a maximum of $21,000, plus any unused contribution room carried forward from previous years.
If you are/were a member of an employer-funded RPP or DPSP --
For the 2009 tax year, your current year's RSP contribution limit is 18% of your previous year's earned income to a maximum of $21,000 minus the Pension Adjustment reported by your employer (found in box 52 of your previous year's T4 slip), plus any Pension Adjustment Reversal reported by your employer on Form T10, and any unused contribution room carried forward from previous years. This information is intended as a guideline only. Please contact CRA for full details and calculations.
- Is there any problem with always waiting until the last minute to contribute to my RSP?
It's a sound strategy to contribute early in the tax year. Contributing at the earliest possible date rather than waiting for the deadline can make a big difference because your savings can generate more compound income. The difference really adds up!
Three people contribute $18,000 a year at 6% compounded annually:
Person "A" contributes in January at the beginning of
the tax year.
Person "B" contributes in December, at the end of the
tax year.
Person "C" contributes $1,500 every month.
At the end of 35 years, their RSPs are worth:
| Person |
RSP Value |
Person "A"
January, beginning of tax year |
$2,126,176 |
Person "B"
December, end of tax year |
$2,005,826 |
Person "C"
Monthly, 12 months/year |
$2,070,435 |
In 35 years, "A" has $120,350 more in their RSP than "B"!
In 35 years, "C" has $64,609 more in their RSP than "B"!
The example above is based on a constant 6% rate in order to illustrate the advantages of tax-deferred savings and compounded returns. Because actual interest rates fluctuate, the amounts shown do not necessarily represent the value you would actually accumulate in an RSP.
Our Contribution Calculator tool can help you determine your retirement needs and the savings required to reach your goals.
- What is RSP carry-forward?
If you don't contribute the maximum allowable to your RSP in any year, you can carry the unused portion forward indefinitely. Any amounts "carried forward" are reflected in the statement provided by Canada Revenue Agency with your "Notice of Assessment".
- Does it make sense to borrow money for my RSP contribution?
Your RSP contribution could be the most important investment you make every year. So even if you haven't got cash on hand now, it can pay to borrow with an RSP loan or line of credit. But don't forget, credit applications are subject to meeting the financial institution's lending criteria, and using borrowed money to finance the purchase of securities involves greater risk than a purchase using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest remains the same even if the value of the securities purchased declines.
Consider what happens if you miss a single $1,000 contribution at age 31. It doesn't sound like much, but if you were to factor in a 6% annual rate of return and assume you didn't make up for this contribution in a future year, you could witness a dramatic $9,285.72 reduction in the net value of your RSP by the time you reach age 71.
Here's another way to look at it --
| The benefits of using credit to contribute |
| Borrow $1,000 and contribute it to your RSP |
$1,000.00 |
Return on RSP investment at 6%
for 1 year:
for 10 years:
for 40 years: |
$60.00
$791.00
$9,285.72 |
| Repay loan over 12 months - total of payments |
$1,033.00 |
| Loan interest paid over the 12 months |
$33.00 |
The example above assumes that your RSP earns 6% interest compounded annually, the loan interest rate is 6% compounded monthly, and the loan is repaid in 12 equal monthly installments of approximately $86. Rates are for illustrative purposes only. They are not intended to be representative of current rates.
It can also make good sense to invest your income tax refund in your RSP so it can earn tax-deferred income until it is withdrawn. Or you can use it to pay off your RSP loan early with no penalty, or to pay down your line of credit.
- Can I deduct the loan interest as with other investment loans?
No.
- Should I pay down my mortgage or put money into my RSP?
The answer to this question depends on many factors. If you are close to retirement, then the benefit of the RSP, outside of reducing income tax, is minimal. So paying down your debt in this instance can be a better solution. Otherwise, normally it can be better to choose the RSP, due to the benefits of compound returns over time. A good solution to this dilemma can be to put money into your RSP, and pay down the mortgage with the tax refund it can provide you. Contact any TD Canada Trust branch for more information and help analyzing your specific situation.
- What types of investments/accounts are available for my RSP?
At TD Canada Trust, you have available to you a wide variety of RSP investment options including :
You should choose investments that will meet your financial objectives in terms of the risk or safety of the principal, and your need for income, growth and liquidity. This is your retirement nest egg in which you are investing, so take the time to investigate the different types of RSPs and support available at TD Canada Trust and TD Waterhouse.
- What kind of investments can I have in my Self-Directed RSP?
- Mutual funds
- Common and preferred shares of Canadian corporations listed on any Canadian and many foreign stock exchanges
- Fixed income securities including bonds, debentures, strip bonds and notes --
- issued by a corporation that has shares listed on a Canadian stock exchange
- issued by a Canadian government (federal, provincial or municipal)
- guaranteed by the Government of Canada
- Many foreign shares and fixed income securities
- Canadian and Provincial Treasury Bills (T-bills), Canada Savings Bonds and Provincial Savings Bonds
- Term Deposits, GICs and cash in Canadian currency
- Options to purchase eligible securities
- Mortgages
Certain other investments may also be eligible for your RSP. For details, please contact your tax advisor or Canada Revenue Agency District Taxation Office.
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